Americans make plenty of mistakes with their money, which may help explain why the financial advisory sector and the debt collection sector are thriving these days.
The thing is, money mistakes are common and almost always self-inflicted. According to a recent survey by DepositAccounts, 85% of Americans admit to having made mistakes with their finances over the past 10 years.
Of course, some mistakes are bigger than others.
The same survey shows “the worst” financial mistake of the last decade was racking up credit card debt (23%), followed by not saving enough for retirement (16%), spending beyond their means (16%), and paying bills late (8%).
Are Americans Financially Illiterate?
Financial experts have their own idea about money mistakes people make that are so egregious, that the negative impact can last decades.
“The biggest money mistakes most Americans make are due to a lack of knowledge of the way money works,” said Mark Williams, chief executive officer at Brokers International, in Atlanta, Ga. “Money can make money and most people do not understand how that happens and how to take advantage of compounding.”
Like a growing number of money mavens, Williams believes that Americans suffer from financial illiteracy – and that Uncle Sam shares the blame.
“Most people aren’t financially literate because we don’t emphasize financial education as important in today’s school curriculum,” Williams said. “We need a grassroots effort to introduce proper financial techniques into the school systems for younger Americans.”
Others say that too many Americans have a fundamentally misguided outlook on what constitutes a decent money savings level –- another financial trainwreck that can last for years.
“The biggest money mistake is most Americans don’t save enough money, so they have to work for money for their entire lives,” said Grant Sabatier, co-founder of BankBonus.com. “This significantly limits their freedom.”
The average savings rate is about 4% in the U.S., which unfortunately means most Americans will never be able to retire, Sabatier said.
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“Just increasing your savings rate to 20% will ensure most Americans can retire in 25 years or less,” he noted. “If you can save 30%, you can retire in 20 years or less. 40%, 15 years or less. The higher your savings rate the faster you’ll reach financial independence.”
Bouncing Back from Money Mistakes
The good news is that it’s more than possible to rebound from money mistakes.
If you’re making those mistakes, or better yet, want to avoid making personal finance miscues, Michael J. Garry, a financial planner and author of the book, “The Smart Person’s Guide to Financial Planning & Investments: A Simple and Straightforward Approach to Understanding Your Personal Finances”, has a five-step strategy to recover.
It’s well worth a look.
1. The first thing to do is take stock of your current financial position. Get all of your financial information together, maybe with the help of a certified financial planner. “You’ll need to gather everything related to your finances: bank statements, investments, retirement, and all of your bills and debts,” Garry said.
2. Figure out your net worth and compare your income to your expenses. Are you in a good spot with both issues, or with one or the other? Is your mistake something easy to overcome or will it be a journey? Tackling those questions will give you a better handle on your financial life.
3. Build a sustainable household financial management plan. Depending on the answer to those questions, you will need to create a long-term financial plan to get you into better shape with the ultimate goal of being able to comfortably retire at some point.
4. Find the money and save it. If your income isn’t enough to pay your bills and save what you need to, you either need to increase your income or cut some discretionary spending.
“Most financial planners are all about cutting spending,” Garry noted. “Personally, I think it depends on the situation and what would work best for you. I worked a second job for years to help pay down my student loans. Yes, it wasn’t fun, but it worked.”
5. Track your progress. Once your plan is in place, you need to check on it periodically to make sure it’s still the right plan and make adjustments as needed.
“It’s common to make adjustments along the way because your situation and goals are likely to change throughout your life,” Garry added.